Drought, Oversupply and Sustainability on Growers' Minds

Napa, Calif.—As usual, this year’s Vineyard Economics Seminar provided an almost overwhelming amount of information for growers, wineries and lenders to consider.

Two themes touched almost all the sessions at the seminar held May 15 at the Napa Valley Marriott: the large inventory of wine from the last three bountiful harvests (no one is calling it a glut) and the drought, now in its fourth year.

With most observers expecting at least an average harvest this fall, growers are looking at options with their winery customers generally holding plentiful stocks.

And though the drought is on everyone’s mind, almost all agree that it hasn’t had much impact so far, though a number of speakers commented that they weren’t sure what would happen if the drought continues. Fortunately, forecasts of El Niño forming in the southwestern Pacific may make that issue moot.

Also threading through the talks was the topic of sustainability and its impact on the market.
Survey of growers
The seminar began with the Vineyard Economics Survey of growers, wineries and lenders. Kathy Archer, president of the Wine Industry Symposium Group, gave the report for founder David Freed, who was away on family business.

She also summarized the wine business last year:

• Replanting and new vineyard plantings are slightly down in California, but there’s more replanting and new planting in the North Coast.

• The big three producers were flat or down in volume for the first time in recent memory (though only in wines retailing for less than $10).

• Imported wines—both bottled and bulk—declined 6% from 2013.

• Direct-to-consumer (DtC) shipments grew 15% in 2014.

• The decline in sales of wines priced below $10 per bottle continued, while sales growth of wines more than $10 increased.

Growers report their top reasons for replanting are changing varieties followed by better rootstocks, closer spacing, planning to harvest and prune mechanically, the time being right with low interest rates, adding water-saving technologies and having backup due to three large harvests. Surprisingly, fewer are replanting due to widely discussed leafroll or red blotch virus.

As to the drought, growers think the biggest impact on them will be more regulations, followed by low yields, but many see no change. Half, however, are adding water-saving technology; one-third are seeking new sources, and one-tenth are investing in recycling.

Grape and wine sales
The second presentation was by Glenn Proctor, partner of The Ciatti Co. He summarized wine sales according to Gomberg, Fredrikson & Associates in Woodside, Calif.:

• California domestic and export sales were up 4% by value, while bottled imports were down 1% and bulk imports down 16%. (They’re down 40% for 2015 so far, partly due to the shipping strike on the West Coast).

• On the other hand, sales of premium wines (more than $10) from coastal wineries were up 15%. But wines selling for less than $10 are 75% of the market.

• The 2014 California grape harvest was 3.89 million tons, down from 2013’s record 4.24 million tons, but still above average. Proctor said that winery buyers are being “deliberate” and even putting some of their own grapes on the market.
Going green
One of the most lively discussions of the day was about the importance and role of sustainability in grapegrowing. Most growers would agree that growing to stay in business, treating employees well and not degrading the environment is the right thing to do, but those in the Lodi AVA were pioneers in using the concept as a marketing tool to differentiate and publicize the region’s grapes.

Other regions followed, but Sonoma made a gutsy move a year ago shooting for 100% sustainability by 2019. Karissa Kruse, president of the Sonoma County Winegrowers, noted that almost 60% of the county’s vineyards had enrolled in the program, and one-third were certified after only 15 months.

While admitting that she believes that sustainability is a way to distinguish the county, she said that one-third of consumers queried said it would make them more likely to buy a Sonoma wine, and noted at that least two large wine grape buyers—Francis Ford Coppola Winery and Jackson Family Wines—are paying premiums for sustainable grapes.

On the other hand, Steve Smit, the vice president of grape management at Constellation Wines, said that while his company took sustainability into account in choosing grapes, they don’t pay more. “We believe it’s more economical to farm sustainably, and the grower benefits.”

He added, “Sustainability will become a mainstream part of society and business. The use of sustainability as a marketing tool will disappear.”

Speakers and audience members also thought consumers might be confused by the many seemingly competing programs and labels.
Expect more regulation
John Aguirre, president of the California Association of Winegrape Growers, reinforced that belief, warning that the conflicting claims will likely lead to federal regulation.

Aguirre also discussed important political issues, many tied to the drought and labor. Many steps are being taken to deal with water shortages, but the legislature and governor aren’t yet calling for more storage. He warned growers to expect more regulation. “Today’s drought leads to tomorrow’s laws.”

One issue of great concern is proposed punitive tariffs on California wine if the U.S. institutes Country of Origin labeling on Canadian and Mexican beef. “It could double the price of California wine in Canada,” one of our biggest markets.”

Finally, Aguirre reminded growers to vote for the Pierce’s disease assessment, reminding them that the funds can be use for other pests, too.